Arnold Kling’s Path to Austrian Economics

Arnold Kling explains how he gravitated to Austrian economics.

I was explaining to someone at dinner the other night that I came to Austrian economics in a very odd way. I did not study the sacred texts. I spent the prime of my career outside of the academy, experiencing the behavior of organizations. I saw first-hand the challenge that large organizations have in dealing with innovation. I saw the tenuous grasp that bosses have over their organizations. Above all, I saw how impossible it is for top management at firms to have the sort of information and control that is casually assumed in mainstream economic models. It is a relatively small leap from that insight to the insight that government officials also lack the information that they need to exercise the sort of control that is casually assumed in mainstream economics.

I came to Austrian economics because that is how business in the real world felt to me.

This comment also reveals the close relationship between Austrian econ and public choice theory, which seems to me to link through Hayek, but almost solely through Hayek.

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About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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25 Responses to Arnold Kling’s Path to Austrian Economics

  1. D. C. Sessions says:

    That explains the attraction of the hypothesis, but doesn’t explain how it works as a model.

  2. James Hanley says:

    To be fair, that’s not what Kling was trying to explain in the bit I quoted. Still,This
    the insight that government officials also lack the information that they need to exercise the sort of control that is casually assumed in mainstream economics.
    seems to me a clear insight into how the model works.

  3. AMW says:

    On a related note, here’s Kling’s co-blogger, Bryan Caplan, on his path out of the Austrian School.

    I think the Austrians have some good insights. But I think that if they want to make a real impact on the profession, they’ll have to abandon their allergies to statistics and models. If they started incorporating some models from evolutionary biology, things might really start to crackle. (Sadly, I don’t know enough models of evolutionary biology to be of any use here; but it seems like the basic approach would be congruent with the Austrians.)

  4. James Hanley says:

    From Caplan’s piece (and thanks for the link):

    My equation of Austrian economics with Mises and Rothbard rather than F.A. Hayek is … simply that Mises and Rothbard clearly rejected many of the key elements of modern neoclassical economics, while Hayek did not. If Mises and Rothbard are right, then modern neoclassical economics is wrong; but if Hayek is right, then mainstream economics merely needs to adjust its focus.

    Agreed. As much as I have been influenced by Hayek, Mises and Rothbard left me cold. In act I sometimes wonder if it’s really very accurate to call Hayek an Austrian economist (beyond the fact that he was from Austria and was an economist), for much the same reason Caplan gives for separating him from the Mises/Rothbard bloc.

    The rest of the article is good, too. Caplan’s not only unusually insightful, he’s unusually good at writing out his insights in clear language.

  5. D. C. Sessions says:

    I can’t really get worked up over something that’s essentially philosophy with no grounding in the real world. If a field isn’t capable of making testable predictions (e.g. the price of Treasuries over the past three years) then it’s essentially mental masturbation.

    I’ll excuse that in the arts, and even to a degree in applied philosophy like ethics. Economics? I don’t see it.

  6. AMW says:

    D. C.,

    In practice, Austrians are fine with empirical analysis, so long as there are no t-tests and p-values involved. If you’re pointing to a historical example that demonstrates or contradicts this or that hypothesis, they’re usually fine with that.

  7. D. C. Sessions says:

    So from an empirical perspective: how have their models held up in the last five years?

  8. James Hanley says:

    Well, so far their model of the economy as a complex adaptive system that can’t successfully be centrally manged doesn’t seem to be doing too badly. *grin*

  9. D. C. Sessions says:

    Human beings are complex adaptive systems, but it’s not only possible but routine to make high-quality predictions about what will happen if you subject them to (for instance) sublethal carbon monoxide inhalation, closed-head injuries, or chronic subacute ethylene glycol ingestion.

  10. Lance says:

    D.C. Sessions,

    Your analogy is a bit strained don’t you think? It’s like saying that I can predict the future weather because I know what would happen to it if the sun went red giant, vulcanism increased ten fold or the earth where hit with a Kansas sized asteroid.

  11. D. C. Sessions says:

    I deliberately chose non-catastrophic influences, but by all means invent your own analogies. The systemic effects of closed-head injuries are, however, chosen precisely because the human body is an adaptive system.

    The bottom line is that waving “complex adaptive system” is not sufficient to excuse one from empirical testing of hypotheses.

  12. Troublesome Frog says:

    I like Kling’s analogy. It’s a good one, but it’s two-edged. In my experience, while top management can’t control the minutia, things get really messy when they go hands off on the overall direction. When the left hand doesn’t know what the right hand is doing or worse, when two departments have conflicting needs, somebody needs to grab the tiller.

    Well, so far their model of the economy as a complex adaptive system that can’t successfully be centrally manged doesn’t seem to be doing too badly. *grin*

    The Austrians are periodically spot on with their, “Something bad is going to happen sometime in the future” prediction. It seems to happen with a certain periodicity. It’s tempting to mention an old saying about something else that’s right with a cyclical pattern.

    I guess my primary question is how they’re holding up in the storm of hyperinflation and the skyrocketing interest rates.

  13. AMW says:

    So from an empirical perspective: how have their models held up in the last five years?

    I’m not a macro guy, so I tend to stay out of these sorts of things. I’ll serve up the following, but with a hefty disclaimer that I’m no expert.

    1. High levels of liquidity are known to make asset bubbles more severe in laboratory experiments.
    2. Crashes in the housing market (i.e., the bursting of a bubble) are known to have preceded something like 9 of the last 11 recessions/depressions.
    3. Austrians hate loose monetary policy.

    Do they hate it for the wrong reasons? Maybe so. Do the results we find for financial assets carry over to durable goods like housing? Well, I’m doing some lab research on that with some other guys, and we’re having a devil of a time getting a bubble to form.

    To me, it’s a big question mark. The economy is really, really complicated; and I’d say we know a lot less about how it operates than doctors know about the human body. Probably that’s because there are so few data points. Sure, doctors are dealing with complex, interdependent, emergent systems. But they can do randomized controlled trials with hundreds or thousands of those systems in a year. A set of macro data expands by 1 to 12 data points per year (depending on whether it’s annualized, quarterly or monthly). And nobody’s running randomized controlled experiments on economies.

  14. D. C. Sessions says:

    What does Austrianism predict will happen to prices of goods and bonds when the money supply expands dramatically as it did in 2990-2010?

  15. Dr X says:

    How did the Austrians hold up in the last 5 years? Well I’d certainly agree it was a credit-fueled bubble, so in one sense you can say that Greenspan (an Austrian sympathizer) had a hand in it failing to recognize what was happening. But I don’t think this approach provides enough nuance. What we also had going on was a boom fueled by the bundled mortgages in a completely unregulated shadow banking market. Buyers were not seeing that what they were buying was not the same as traditionally low–risk ,mortgage debt, so what happened wasn’t merely a normal contraction of borrowing, but a catastrophic bursting of the bubble–arguably a failure of regulation that wouldn’t have happened before late 20th century deregulation began in earnest. Take the Fed and the Treasury out of it somehow? Market corrections aren’t necessarily any more pretty when they correct non-governmental mistakes than when they correct governmental mistakes. If we go back to pre-Fed days, bank panics and depressions were regular features of the American economy. In contrast, we made it from the end of the great depression to late 2008 without such comparable instability.

    The information argument also requires far more nuance, I think, but I’ll save that for another time.

  16. lukas says:

    Greenspan an Austrian sympathizer? Have you got a quote from him to that effect?

  17. D. C. Sessions says:

    Whether Greenspan is an Austrian sympathizer is as much a matter of definition as anything else. More precisely, he’s a self-described Randroid.

  18. AMW says:

    What does Austrianism predict will happen to prices of goods and bonds when the money supply expands dramatically as it did in 2990-2010?

    The main prediction is that prices will go up, but not evenly. Those who get the money first will bid up the prices of goods/services they want. The producers of those goods/services will then turn around and spend the money on their own preferred goods/services, etc. With each step the money gets diffused to a greater and greater degree, so that the biggest price/quantity impact is in the first step, then in the second step, and so on. These changes in relative prices will look like opportunities to satisfy real changes in preferences, and so will attract resources into the favored sectors. When the market figures out that there hasn’t been a real increase in demand in those sectors, there will be a correction.

    In contrast, we made it from the end of the great depression to late 2008 without such comparable instability.

    I’m ambivalent on whether we should abolish the Fed, but that sentence is faint praise for having a central bank. It’s rather like saying, “Germany was a pretty peaceful nation from 1918 to 1939.” You’ve cut out the two worst periods of economic turmoil that occurred under the Fed’s watch. One of those periods was unambiguously the worst in American history, and the other is probably in the top five.

  19. D. C. Sessions says:

    What does Austrianism predict will happen to prices of goods and bonds when the money supply expands dramatically as it did in 2990-2010?

    The main prediction is that prices will go up, but not evenly.

    How’s that prediction working out? Do we have hyperinflation yet? How long do we have to wait before the quants figure out that the money supply has exploded? Should someone tell them, or are we hoping that if nobody mentions it they won’t notice?

    How about the price of bonds? With the Treasury flooding the market with US paper, we have as good a natural experiment in Austrian monetary theory as we’re ever likely to see. What does Austrian theory predict when the supply of Treasuries is higher than it’s ever been?

  20. James Hanley says:

    The main prediction is that prices will go up, but not evenly.

    How’s that prediction working out? Do we have hyperinflation yet? How long do we have to wait before the quants figure out that the money supply has exploded?

    I can’t stake an actual position of my own on this, but Scott Sumner keeps arguing that contrary to popular wisdom the money supply right now is actually tight. Other economists are starting to pay attention to him, too. See here (FAQ #3), here, and here, for example . Sumner kind of lost me when he recently said we should ban the word “inflation” and use “NGDP” instead, but he’s not easily rebutted.

    Of course that’s a bit-off track since Sumner’s obviously not an Austrian, but if he’s right about tight money (although I suspect Austrians would disagree with him about that), then we shouldn’t expect to see prices increasing, and the Austrian hypothesis is simply not actually being tested.

  21. Troublesome Frog says:

    James Hanley,

    I think that Sumner is right about this. That particular part is another way of phrasing what a lot of economists are saying. And of course, the Austrians would violently disagree. They seem to have no interest in the concept of the demand for money, so the idea that the supply of it can shift to keep the two in balance is simply a non-starter.

    As an aside, I still can’t get my head around Sumner and DeLong’s disagreement here. As far as I can tell, they believe the same thing in link #3 (as usual). Sumner says that the monetary expansion was “contractionary” because the expansion wasn’t big enough. DeLong dislikes the phrasing, probably because as constructed, it implies that the increase in the money supply caused the contraction when in reality, conditions changed such that the new supply amounted to a contracted money supply. Both believe that the Fed should continue to increase the money supply for what seem to be basically the same reasons.

  22. James Hanley says:

    I suspect DeLong’s disagreement has to do with Sumner’s overall view, which is that the recession can be cured simply by expanding the money supply. Sumner doesn’t seem to give fiscal policy any credibility at all, and I suspect that drives DeLong nuts. I haven’t noticed much of a tendency in DeLong to be charitable towards critics of stimulus.

  23. Dr X says:

    Lukas,

    At Mises.org

    Alan Greenspan’s actual policy views may stem from his tryst with Austrian economics about forty years ago, when he was a successful, independent economic consultant and member of Ayn Rand’s “inner collective” of Objectivist intellectuals. Austrian School writings were especially emphasized by various members of that group, which at one time included preeminent Mises scholar Murray Rothbard.

    In fact, in his summer (July 20, 2000) testimony to that same Banking Committee, Greenspan alluded to his “having actually attended a seminar of Ludwig von Mises” in the 1960s and asserted that “I was aware of a great deal of what those teachings were and a lot of them still are all right.”

  24. Troublesome Frog says:

    James Hanley,

    I don’t read DeLong as disagreeing with the abstract notion that “monetary policy” could get us out of the recession. The question is the nature of the monetary policy. If a true “helicopter drop” or something very similar were possible, that would take care of it. But that’s not what we get. Real monetary policy swaps interest bearing bonds for dollars. That becomes kind of a silly exercise once those T-bills stop being “interest bearing” and become practically equivalent to holding cash.

    Sure, you could argue that real interest rates are the important matter and that some inflation could give us negative real rates, but you still have the same problem: Where does your inflation come from? Can you swap dollars for zero interest bonds and cause inflation, or will you just see the velocity of money drop like a stone like we’ve been seeing? A liquidity trap is pretty narrowly defined, although that definition seems to hold for our political environment.

    Sumner has them buying debt at all different maturities and threatening to do whatever it takes to make inflation happen. I see no reason to believe it won’t work as long as the Fed is really willing to put its scary face on and buy weird stuff in the face of a political storm. I don’t see DeLong disagreeing with that either as he has consistently supported a credible higher inflation target. Then again, I could be the guy at the wine and cheese tasting who says, “This all just tastes like wine and cheese to me.”

    As for being uncharitable to dissenters, that’s an unfortunate problem. Aside from being generally rude, I think it shuts down a lot of potentially interesting exchanges.

  25. James Hanley says:

    Then again, I could be the guy at the wine and cheese tasting who says, “This all just tastes like wine and cheese to me.”

    I’m sympathetic to that. The more I’ve been reading, the less I see any clear distinction between the monetary and fiscal policy folks. The hard theoretical lines of the textbook models seem to have become obscured over the years, so that now it’s more a range than a category distinction.

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